In this final part of our green leases trilogy, we discuss the impact that introducing ‘green’ clauses into a commercial lease can have on standard clauses such as rent review, alterations, alienation, and service charges.
To recap, our previous articles summarise the general principles of green leases (read more here) and consider specific green lease clauses commonly included in commercial leases (read more here).
It is essential to consider green lease clauses in the wider context of a commercial lease’s general terms, both at the heads of terms stage and during the lease’s legal negotiations. This is particularly so as the new Government’s intentions for standards for commercial buildings remain uncertain.
It is also worth remembering that Minimum Efficiency Energy Standards (“MEES”) regulations require that a landlord does not let or continue to let a ‘sub-standard’ property, and penalties apply if they do so. But MEES does not specify which party is to carry out any upgrade works or who should pay for them.
A selection of some of the key commercial lease clauses, and points to be aware of, are discussed below:
Service charges
Green lease clauses could potentially impact the level of service charge payable by a tenant.
In most cases, any MEES-related works are unlikely to be the tenant’s responsibility unless the tenant’s works impact the building’s EPC or if the tenant is contributing to the cost of the improvement works. There are currently no statutory obligations on tenants or landlords specifically to upgrade ‘sub-standard’ properties.
A tenant should adopt a protective position and seek to exclude any works from the service charge other than the items beyond economic repair or where there is an identifiable cost benefit to the works. The landlord may seek to use to service charge as a method of recouping the costs of environmental upgrading works even if this is not provided for in the lease. A tenant with a strong negotiating position may argue that improvements to a property should be seen as an investment (to be made by the landlord) in the freehold reversion. Alternatively, a tenant may seek to place a cap on these costs or reach a compromise to share them with the landlord.
Sustainability measures may reduce the service charge payable in the event that, for example, energy-efficient lighting, water-saving features, and waste management systems may result in reduced operational costs, including lower energy bills and maintenance expenses. By incentivising sustainable practices, green lease clauses can align the interests of landlord and tenant in reducing overall operational costs whilst promoting environmental efficiency.
Tenant fit-out and alterations
Where the building is a new development, the building owner will often aim for an ‘Excellent’ or ‘Outstanding’ BREEAM rating, primarily to increase marketability. They will want to make sure that any tenant fit-out does not adversely affect the rating. They may require that the tenant’s fitting-out works are within certain BREEAM requirements.
A landlord may also seek clauses which require the tenant to carry out any alterations in accordance with prescribed energy efficiency standards, or in line with certain efficiency objectives. These should be set out in the lease and agreed upon between the parties before the lease is finalised so that the tenant is aware at the outset of the standards it will need to meet.
Green leases with a tenant covenant to not carry out any alterations to the property which would negatively impact the EPC are very common. A tenant must be comfortable with meeting such requirements before committing to it in the lease. The alterations clauses in a lease may also seek to influence the materials used by the tenant in carrying out their works, and even the contractors selected by the tenant for their works.
Rent review
Any works carried out by the tenant, at its own expense and in compliance with the lease, are generally disregarded at rent review meaning that the tenant will not be subjected to a higher rent because of its own improvements.
If the landlord carries out these works however, any impact on the open market rental value is likely to be considered on review. The tenant may, therefore, essentially pay for the improvements at rent review. If a tenant has already been subjected to increased service charges as a result of the improvements, it should be careful to ensure that it does not effectively pay twice through the rent review provisions. Careful consideration should be paid to the integration of the green clauses throughout the lease and the potential impact of one clause on another.
There may also be an assumption that the parties have complied with the lease’s provisions at rent review. Where provisions are not being complied with, the rent could be skewed in either direction at rent review. For leases with substantial rent and an open market rent review, it is important that a specialist rent review surveyor is able to input at both the lease drafting stage and the point of review.
Assignment and subletting
When agreeing to assignment provisions, a tenant should be mindful that an assignee will expect the property to be compliant and will also scrutinise covenants in the lease that they will take on as tenants. It may be possible to agree that certain green provisions are personal to the original tenant and are not enforceable following the assignment.
On underletting the premises, as the tenant becomes a landlord in its own right, it will take on the duties to ensure that the property is up to the standards that mean it can be let. A tenant could try to negotiate provisions that where the tenant is proposing to underlet the landlord is required to undertake any works necessary to ensure that they can lawfully do so.
Where landlord’s consent is required, it is possible that the landlord will seek to withhold consent where it considers that a proposed assignee or undertenant will not comply with the green provisions of the lease, or their proposed use of the property is not compliant.
Conclusion
Green lease clauses have a holistic impact on commercial tenancies, extending beyond sustainability to influence various aspects of leases. Whilst promoting environmental responsibility, operational efficiencies and cost savings can also be made. Tenants should ensure they understand the wider impact of their green lease clauses on their other obligations under their leases.
